Income Tax Penalties

Income Tax Penalties

Civil penalty brings monetary fines

Criminal penalty can be both and possibility for prison

Failure to file 5% for every month from 04-15 through 08-01

Failure to pay – failing to pay the tax. Extensions to file do not mean extension to pay.

½ percent per month

Interest rate on over and under payment is 3%

All ad valorem penalties

No tax owed means no interest or penalties



Accuracy Related Penalty

Penalty is 20% of of the tax underpayment that is attributable to:

Section 6662

Substantial understatement of income tax

–          A substantial understatement is 10% of the taxes required to be shown or $5,000 (greater)

–          Can be avoided in 2 ways

  • Amount of understatement shall be reduced to the portion of the understatement that was attributable to substantial authority
    • Rulings
    • Committee reports
    • Press releases from IRS
    • Regulations
    • Conclusions from treatises, periodicals are not authority
  • Relevant facts are disclosed
    • Form 8275 is disclosure form

Negligence or disregard of applicable tax rules

6664 defines underpayment – difference in what the govt assess and what you pay


Civil Fraud – civil fraud penalty is 75% of underpayment attributable to the fraud

Fraud is knowingly underreporting income



Exceptions to 6654

1 current year tax is < $1,000

2 prior yr tax is $0

3 90% of current year

–          Gross tax is $20,000

–          20,000 x .9 = 18,000

4 prior exception – 100%

2011 : $15,000 (gross tax)   pay $15,000 estimate

2012: $40,000 (gross tax)

Tax preparer- anyone who prepares for compensation a tax return

6694 penalties on tax preparers, $1000 on all unreasonable positions. 5,000 is intentional

If preparer of any return in which any part of an understatement is due to a position from paragraph 2 and reasonably should have known it was an unreasonable position

–          No substantial authority

–          Not disclosed


Statutes of limitations

On assessment (notification that tax is owed) is 3 yrs of file date

–          Exceptions

  • Fraudulent return
  • Never filed
  •  Period can be extended to 6 years if amount that is greater than 25% of gross income is omitted
  • Given permission from taxpayer

On collections

–          10 years after timely assessment is made


Limitations on refunds

Must file a claim for refund within 3 years of filing

Or years of filing

Whichever is later


Offers in compromise form 656          file 1033

Doubt as to collectability

Doubt as to liability

Installment agreement – form 9465

–          Can only owe for 1 yr

–          Must file on time the next year

Income Tax Penalties


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